How 504 Funds Can Be Used
The primary purpose of 504 loans is to finance commercial real estate, other fixed assets, and capital equipment for small and mid-sized companies that will be the primary occupants or users of the property financed.

504 loans may be used for:

Land or building acquisition

Building construction or remodeling

Transaction costs such as 504 fees, appraisal, title & escrow, etc. can be included in the financing, provided they are supported by the project appraisal.

Capital equipment with a long economic life, including the financing of production equipment and even solar power generation systems.

Companies buying existing buildings must occupy at least 51% of the net rentable space, and companies constructing new buildings must initially occupy at least 60% of the space, with the intent to occupy some of the additional space within three years.

How are 504 projects structured?

SBA 504 loans are generally financed like this:
In 504 projects, a conventional loan from a bank or other institutional lender usually provides 50% of the project financing, the 504 loan typically provides up to 40% of the project financing, and the buyer provides a minimum 10% down payment.

504 loans make up a maximum of 40% of a project, or $5,000,000 for most projects, and up to $5,500,000 for manufacturing companies and for projects that conserve energy or produce renewable energy. Projects from $300,000 to as much as $20 million are viable 504 candidates.

504 loans are take-out or permanent financing. As a result, the lender providing the 1st mortgage loan also provides interim financing of the 504 portion of the loan for projects including remodeling or construction, or a short term bridge loan to facilitate a quick close for building purchase projects. The 504 loan provides funds to pay off the interim or construction financing.

What are the terms of a 504 loan?
SBA 504 real estate loans are twenty-year, fixed-rate, fully amortizing loans. We also offer 504 loans with ten-year, fully-amortized fixed-rate loans for projects involving the acquisition of capital equipment with a shorter economic life.

The 504 interest rate is fixed over the term of the loan at the time of 504 loan funding. The rates are market-determined and the twenty-year 504 loans are typically priced at the ten-year Treasury rate plus a spread of 2.5% to 3% (please see the Current 504 Rate Page). 504 loans with ten-year terms are typically priced at the five-year Treasury rate plus 3.0% to 3.5%.

504 fees are 2.65% of the 504 loan plus a $2,500 loan closing fee. The 504 fees are financed with the overall project. 504 loans are fully amortized and have no balloon payments or call provisions. 504 loans have a formula prepayment penalty for the first half of the loan term. Note that the bank making the first mortgage loan also pays an SBA fee of ½% of the first mortgage loan amount, and this fee is normally passed on to the borrower.

What are the terms of the conventional (bank) loan?
The bank loan carries market rates and fees and may be structured as a fixed or variable rate loan. To participate with a twenty-year 504 loan, the bank loan must have no call or term features of less than ten years. To participate with a ten-year 504 loan, the bank loan must have a term of at least seven years. Please note that the bank is also required to pay a participation fee of ½% of the project first mortgage loan to the SBA, which is typically passed on to the borrower. Although a complete funding proposal is prepared by Bay Area Development Company for use by the Bank and the SBA, it is the client who negotiates the bank rate and terms.

Is my company too big or too successful for a SBA 504 loan?
504 loans are targeted to successful, growing companies – the more successful the better. In fact, almost all privately held for-profit companies are eligible small business for SBA financing. Applicants must have a proven ability to repay the financing, but well-structured new ventures may also qualify. Contact our staff for details.

How do I apply for a 504 loan?
Bay Area Development Company can pre-qualify your company for a 504 loan in 24 to 48 hours at no cost to you. The information needed to be pre-qualified is minimal and there are no forms to complete. Simply contact one of our loan officers to discuss your project. We can also pre-qualify your company for an estimated project amount prior to your identification of the specific property you want to purchase. Go to the SBA 504 Loan Calculator to generate an instant quote for your project and see how 504 financing can work for your company.

What if I have other questions regarding 504 financing?
We are here to serve you. If you have additional questions about 504 or your specific project, please call or email us. One of our loan officers will be happy to provide you with all the information you need.